Alberta’s oil limits finally seem to be working

CALGARY (Bloomberg) --Alberta’s oil production curbs finally appear to be draining inventories, at least for now.

Crude supplies in Western Canada fell by 2.75 MMbbl last month to the lowest since November 2017, Genscape said Wednesday. The decline is welcome news for the province, which has been struggling to set production limits at a level that would shrink inventories by making oil cheap enough to stimulate exports by rail, but not so cheap that prices collapse, as happened last year.

“It seems like the government is playing it safe to very carefully nudge that production back up,” Rory Johnston, commodity economist at Scotiabank, said by phone. “It’s going to be a Goldilocks testing game.”

Crude-by-rail exports have picked up, rising in June to the highest monthly average since January, according to Genscape. Oil sands producer Cenovus Energy said last month it was “on track” to ramp up crude by rail shipments to 100,000 bpd by year-end while Canadian Pacific Railway expects crude-by-rail shipments to rise 20% this quarter versus the last. Pipeline companies are also finding ways to add some extra capacity to existing pipelines.

Still, stockpiles could swell again, now that oil sands facilities have finished seasonal maintenance and are dialing up production.

“Producers were ramping up rail while the turnarounds were occurring,” Kevin Birn, IHS Markit’s director of North American crude oil markets, said by phone.

The local price for heavy Western Canadian Select has stayed strong relative to West Texas Intermediate futures even as inventories have fallen. To incent further rail shipments that would deepen the inventory decline, heavy crude’s discount to the U.S. benchmark would need to widen from about $13/bbl now to $20/bbl, Scotiabank’s Johnson said.

Last week, Imperial Oil said it would “ramp down” crude-by-rail exports from its Alberta terminal because oil prices were too strong to make it economic.